Kerr v. CIBC World Markets Inc., 2017 ONSC 777

COURT FILE NO.: 04-CV-265351-CM1

DATE: 20170223

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Margaret Grace Kerr

Plaintiff

– and –

CIBC World Markets Inc., Merrill Lynch Canada Inc. CIBC Wood Gundy Financial Services Inc. Merrill Lynch Insurance Services Inc., Roy Ruppert, Gordon LeRiche and Transamerica Life Insurance Company of Canada

Defendants

Mark Polley and Jason Haylock, for the Plaintiff

Laura Paglia and Caitlin Sainsbury for the Defendants CIBC World Markets Inc., Merrill Lynch Canada Inc. CIBC Wood Gundy Financial Services Inc. Merrill Lynch Insurance Services Inc. and Roy Ruppert,

HEARD: January 3 – 6, 9, 11 – 13, 16 and 18, 2017

penny j.

Overview

[1] In this action, the plaintiff sues her investment advisor for negligence and breach of fiduciary duty. The plaintiff alleges that her investment advisor recommended investment objectives and investments which were unsuitable for a person of her age, experience and needs. She argues that these recommendations constituted breaches of the duties owed to her as the defendants’ client. She further argues that these breaches caused the depletion of her substantial investment portfolio, giving rise to damages.

[2] The defendants, Roy Ruppert and CIBC World Markets Inc., concede duties of care imposed by law on professional investment advisors but take the position that the relationship with the plaintiff did not give rise to any fiduciary duties. The defendants take the position that there was no breach of their professional obligations. In any event, the defendants say that the depletion of the plaintiff’s investment portfolio was not caused by anything to do with the plaintiff’s investment objectives or the particular investments in her CIBC account but by the plaintiff’s personal, and independent, choice to withdraw substantial funds from her portfolio to develop real property in Jamaica.

[3] The plaintiff also brought a motion to amend her Statement of Claim at the end of trial. That motion was vigorously opposed on the basis that, among other things, the proposed amendments involved the withdrawal of a crucial admission. The proposed amendments relate to the liability claim and will be dealt with in that context.

[4] The issues in this action are:

(1) Did the defendants owe fiduciary duties to the plaintiff?

(2) Did the defendants breach duties of care or any fiduciary duties owed to the plaintiff?

(3) Should the proposed amendments to the Statement of Claim be allowed?

(4) If the defendants breached their duty, did the breach cause the plaintiff’s loss? and

(5) What is the amount of the plaintiff’s damages, if any?

Background

[5] Margaret Kerr graduated from medical school in 1970 and opened a family practice with another doctor in 1972. She worked as a family physician until 1978 when, after receiving a diploma in industrial health, she joined Shell Canada as a full-time occupational physician and eventually became medical director. In 1982, the plaintiff became vice president of occupational health and safety at Alcan in Montréal. In 1987, she was recruited by Nortel and returned to the Toronto area as vice president of environment, health and safety. By the time she retired from Nortel in December 2000 (at age 55), the plaintiff was part of the senior management team, serving as a senior vice president in charge of all Nortel’s human resources. In that position, the plaintiff was located in the executive suite with the Chief Executive Officer and the Chief Legal Officer. She reported directly to the CEO and was one of 40 top earning executives at Nortel.

[6] The plaintiff also had experience as a member of the Board of Directors of two public companies, Labatt’s and Arthur D. Little. She also served on the board of an NGO, the World Environment Centre.

[7] The relevant events in this case involve the period leading up to, and following, Dr. Kerr’s retirement from Nortel in 2000. By that time, Dr. Kerr was divorced with three adult children, all in post-secondary school.

[8] Dr. Kerr’s experience with investing and the stock market appears to have begun around 1996. She met Matt Sammut, an investment advisor at Midland Walwyn, through colleagues at Nortel. The plaintiff was prompted to retain an investment advisor because, as a senior vice president at Nortel, she became eligible to participate in a valuable Nortel stock option plan.

[9] The plaintiff opened an account with Midland Walwyn. It was a margin account, which entitled her to borrow from the firm in order to exercise her options. The plaintiff would then repay Midland Walwyn from the capital gain realized when she sold her newly acquired Nortel shares at prevailing market prices.

[10] The plaintiff’s new account application form from October 1996 shows that the plaintiff had liquid assets of about $250,000. This form reflects investment objectives for the margin account: income - 30%, capital gains - 70% and speculation - 10%. For her RRSP account, the form reflects more income focused investment objectives: income - 50%, capital gains - 50% and speculation - 10%. Mr. Sammut recorded the plaintiff’s investment knowledge as “limited.”

[11] Dr. Kerr’s evidence in chief was that she always exercised her Nortel stock options to the maximum. She also testified that Mr. Sammut did essentially nothing for her other than look after the exercise of her Nortel stock options. Dr. Kerr’s cross-examination and account records showed that this was not entirely the case.

[12] For example, in 1998, Dr. Kerr exercised 10,000 Nortel options but sold only 9,450. She continued to hold 550 shares of Nortel in her account. In 1999[^1], at least 26,666 Nortel options vested but were not exercised and sold. In 2000, another 20,000 options which had vested were not exercised and sold. Dr. Kerr conceded in her cross-examination that she did not always exercise and sell all of her optioned Nortel shares immediately upon vesting because she wanted to hold on to them and wait for a better price. She made these decisions without Mr. Sammut’s input or advice.

[13] In 1998 the plaintiff exercised options, netting about $540,000. To cover the tax liability, $220,000 was held in a T-bill and $190,000 was transferred to the plaintiff’s bank; this left $130,000 to invest. Mr. Sammut provided recommendations to invest those proceeds. The identified objectives in 1998 were: above average growth, liquidity and safety of capital through diversification. The recommended asset mix was: 35% fixed income and 65% diversified Canadian, US and international growth stocks. The proposal outlined the pros and cons of bonds, mutual funds and individual stocks. The evidence is that this recommendation was understood, approved and executed by the plaintiff.

[14] In addition to the Nortel stock option plan and her Midland Walwyn accounts, the plaintiff also participated in the Nortel employee savings plan in which Nortel matched employee contributions up to a certain amount. Sun Life administered the plan. There were limited investment options which included Nortel stock, fixed income instruments and mutual funds. The plaintiff appears to have used a combination of all three investment choices in her Nortel employee savings plan.

[15] In early 2000, Mr. Sammut was retiring from what had then become Merrill Lynch. He suggested the plaintiff switch to Roy Ruppert, another Merrill Lynch investment advisor who was familiar with Nortel and provided advice to other Nortel executives.

[16] The plaintiff and Mr. Ruppert met briefly in March 2000 and again in April for a more in-depth discussion. The April 17, 2000 new client form was filled out and signed by the plaintiff during that meeting. This form reflects increased assets of about $1 million available for investment. Following Mr. Sammut’s lead, it continues to show the plaintiff’s investment knowledge as “limited” but with past experience in stocks, mutual funds, bonds and options. The form lists her investment objectives as: income - 50%, capital gains - 50% and speculation - 10%.

[17] At this April 2000 meeting, Mr. Ruppert also presented the first of many portfolio reviews consisting of a letter reviewing Dr. Kerr’s portfolio, its performance and recommendations for plan adjustments, together with numerous attachments containing backup information for the various issues discussed in the review. As of April 2000, the plaintiff’s portfolio was dominated by Nortel stock. The asset allocation showed: Income - 7% and Equities - 93%, compared to the Merrill Lynch model portfolio for “long-term growth” suggesting a more balanced allocation: Cash - 10%, Income - 30% and Equity - 60%.

[18] It is clear that, at this point, both Dr. Kerr and Mr. Ruppert were expecting significant additional Nortel options to be exercised later that year.

[19] Under the heading Cash Flow, Mr. Ruppert suggested a review of “the suitability of your current holdings to ensure maximum after-tax cash flow to you.”

[20] Under Recommendations, Mr. Ruppert proposed a review of mutual funds “when structuring your account for future growth.” He introduced Dr. Kerr to Horizons, a managed money program that would give Dr. Kerr access to top independent money managers in Canada, the US and globally as well.

[21] He also noted that because Canadian equity markets had consistently underperformed global markets over the long term, “we should focus on non-Canadian Equities positions whenever possible.”

[22] Dr. Kerr testified that while she did not recall the term “long-term growth” being used, she understood that she had money to invest. She testified that if it was invested wisely, there was “a good chance you could increase” the value of the portfolio. Dr. Kerr did not want to put the money in a savings account; she was “looking for an opportunity to save and grow.” She understood what bonds, stocks and mutual funds were and understood the concepts of diversification and market risk. When asked during her examination if she had a view on income versus equity, she replied “I wanted to make money on the stock market.” Dr. Kerr understood that a balanced portfolio would involve some bonds with a lower return and equities with a higher return but more market risk. Dr. Kerr testified that she was comfortable investing over the long term and that she agreed with Mr. Ruppert’s recommendations because they were “reasonable.”

[23] In June 2000, the plaintiff was advised by her Chief Executive Officer that he was retiring and that the new CEO would want his own senior management team. This meant that the plaintiff would also have to go by the end of the year. The plaintiff advised Mr. Ruppert of this change in circumstances almost immediately and asked that he give additional consideration to her financial picture in light of her pending retirement.

[24] The plaintiff knew she had additional Nortel options to exercise in 2000 and additional options over the next three years. In June, she sent Mr. Ruppert a printout showing her options and a schedule of when they could be exercised. She also provided various handwritten calculations of future option vesting scenarios, assuming a range of market prices from $80 to $100 per share. Nortel stock had been trading as high as $182 in March and was $80 at the end of May. Her calculations showed profits of $5 to 7 million from exercising the remaining 2000 options and an additional $9 to 14 million from future options (that is, beyond 2000).

[25] On June 28, 2000, Mr. Ruppert responded to the plaintiff’s queries with some projections to provide “peace of mind.” Those projections were based on “conservative assumptions” which included: a monthly Nortel pension of $7, 000, a required cash flow of $20,000 monthly after-tax, after-tax liquid assets on the exercise of Nortel options of $20 million, an interest rate on fixed income of 6% and a growth rate on equity of 8% (5% after tax). The letter suggested investing half of the plaintiff’s non-registered portfolio in fixed income bonds and the other half in a well-diversified broad based stock portfolio. He concluded, “the numbers show that you can collect income substantially above your required cash flow needs (without drawing down on the principal invested). In fact you will likely continue to grow your asset base considerably over time, even after accounting for inflation and taxes.”

[26] When August arrived, the plaintiff, through Mr. Ruppert, exercised all of her available Nortel options. Nortel was trading at $120 by the end of the month. She realized a net gain on the exercise of these options of almost $12 million before tax.[^2] At the end of August, her account records show that her total portfolio was valued at $13.2 million.

[27] The plaintiff accepted Mr. Ruppert’s recommendation to invest US $4 million in four diversified funds under the Horizons managed money program (US $1 million in each fund). Her August account statement reflects Cdn $6.6 million being transferred to the Horizons accounts. She felt that Mr. Ruppert had a “good handle” on it and that her money would be “invested wisely.” The plaintiff understood that this money was to be invested in “blue chip stocks.” In her examination in chief, the plaintiff testified that she understood investment involved some risk but that these were top managers with good historical returns and that, because the four money managers had different objectives and approaches, the US $4 million investment would be diversified.

[28] In order to open these four accounts, the plaintiff signed another new account application form. Investment objectives for these accounts were shown as 100% capital gain with 10% speculation. On this form, investment knowledge is shown as “good.” The plaintiff signed the form on August 14, 2000.

[29] Mr. Ruppert also recommended, and the plaintiff agreed, that she purchase a fixed income instrument sufficient to cover the tax liability on the exercise of her Nortel options that would become payable the following April. Accordingly, Mr. Ruppert acquired, on the plaintiff’s instructions, fixed income securities of $4.1 million, the largest component of which was Ford Credit commercial paper valued at approximately $3.7 million.

[30] To defer some of the tax, Mr. Ruppert also recommended investing in a film tax credit vehicle called Sentinel Hill. The plaintiff agreed.

[31] At the end of August 2000, approximately half of the plaintiff’s $13.2 million portfolio was in Canadian securities and the other half was in US securities, with most of her Canadian account in fixed income and most of her US account in equities.

[32] Between June and August 2000, Mr. Ruppert and Dr. Kerr also began having discussions about tax and estate planning matters. The plaintiff was about to come into a lot of money which would trigger significant tax obligations. She was still relatively young and was planning to retire. She had three children to whom she eventually wished to pass on some of her wealth in a tax-efficient manner.

[33] Mr. Ruppert introduced the plaintiff to Mr. LeRiche. Mr. LeRiche was an estate planning specialist with Merrill Lynch. Of most relevance to this action is the recommendation, supported by Mr. Ruppert, that the plaintiff invest in universal life policies for herself and her children. The concept was that the policies would be “super funded” which would allow, under applicable tax rules, a certain amount of the investment (net of the cost of insurance) to grow tax-free. After 10 years, the policy owner could borrow against the policy if she needed money. Otherwise, all the growth would be paid out, upon death, to the policyholder’s chosen heirs or beneficiaries, without tax. This investment/tax and estate planning strategy was plainly for the long term.

[34] The initial proposal, which was agreed to by the plaintiff, was to fund her own policy with $500,000 per year for five years for a total of $2.5 million and to do the same for policies for each of her three children in the amount of $300,000 for five years for a total of $1.5 million.

[35] In the event, the plaintiff decided first to reduce the premiums and then to suspend the payment of premiums altogether. The plaintiff invested a total of $800,000 in universal life policies for herself and her children.

[36] In August, the plaintiff instructed Mr. Ruppert that she wanted to pay her sister $5,000 per month until her sister’s pension became available. These withdrawals began shortly thereafter and continued through June 2002, when they were reduced and then eliminated by the end of December 2002. By January 2001, the plaintiff was no longer receiving a Nortel salary. She identified an income need of $20,000 per month (after-tax). This too was distributed to her from her Merrill Lynch portfolio on a monthly basis until January 2003 when the payments were reduced to $10,000 and eventually stopped altogether in June 2003.

[37] The plaintiff wanted to help her children finish their education but, she testified in chief, this assistance could be accommodated within the $20,000 per month distribution from her Merrill Lynch account. She was, at the time, receiving a Nortel pension of about $7,000 per month.

[38] The plaintiff also wanted to renovate her Toronto home with a view to selling it. She identified a need for about $80,000 to do this. She also bought a lot in Thornbury adjacent to her ski chalet and needed additional funds to improve the chalet property. She estimated the cost for this at about $70,000.

[39] The plaintiff had recently taken a holiday in Jamaica and loved it there. She decided to buy land on the water, with the intention of building a beautiful home above the beach. In the August – December 2000 timeframe, her immediate need was for US $125,000 to close the deal on the Jamaican land. She anticipated a future need for about US $1 to $1.25 million to build the home.

[40] Mr. Ruppert concedes that in January 2001 he was aware of all of these income and forecast capital requirements. Mr. Ruppert’s evidence is that, had the plaintiff stuck to these expenditures, all could have been easily accommodated within her existing portfolio invested in accordance with his 2000 recommendations.

[41] Three unforeseen events, however, altered the course of future events.

[42] First, the plaintiff’s options that vested in 2000 were exercised during the last high water mark of the Nortel stock price. The share price dropped in September 2000 and continued to drop until May 2001, when it fell below the strike price of her available options. It never recovered. The plaintiff, therefore, never exercised any more Nortel options. There was no additional money ever derived from stock options, which the plaintiff had previously valued at $9 to $14 million.

[43] Second, the world equity markets went into a slump in early 2001 which lasted for the next several years. The Horizons program, although it consistently outperformed the market, suffered declines in value which, due to the plaintiff’s cash needs, required liquidating these investments resulting in capital losses. The plaintiff incurred a capital loss of $1.6 million on her total portfolio: about $1 million in the Horizons program, the rest from the decline in value of the Nortel shares she was holding.

[44] Third, the plaintiff’s expenditures vastly exceeded what she had planned for or anticipated. Rather than $25,000 per month, the plaintiff’s withdrawals exceeded, on average, more than $175,000 per month. It is not in dispute in this case that no reasonably attainable return on investment could have produced this level of income. One expert, Mr. Horgan, calculated that returns of between 42% and 82% would have been necessary to generate the plaintiff’s actual income expenditures between 2000 and the end of 2003. The other expert, Mr. Boyce, calculated the plaintiff’s “other” withdrawals (that is, in addition to the regular monthly withdrawals of $25,000 and the tax payment of $3.6 million) from September 2000 to December 2003 at almost $8 million (or $7.2 million after the insurance premiums).

[45] These factors are reflected in Mr. Ruppert’s ongoing semiannual portfolio reviews. In January 2001, the plaintiff’s portfolio was worth about $12 million, of which $4.1 million had been set aside for tax. The remaining assets were valued at about $7.8 million. The portfolio consisted of cash/income of 25% and equities of 75%. This was compared to Merrill Lynch’s model portfolio for long-term growth of 30% income and 65% equities. The Horizons managers had outperformed the market but there had been a market downturn, with losses on the S&P and NASDAQ of 9.3% and 28.3%. Mr. Ruppert opined that it was “unlikely” the major US markets would decline in two consecutive years. He recommended “staying the course” and moving any surplus capital to equity to take advantage of lower prices.

[46] In October 2001 the portfolio’s value had declined to $5.4 million. This reflected, of course, payment of the anticipated tax on the exercise of the plaintiff’s 2000 options and the plaintiff’s ongoing cash withdrawals. The allocation was 34% income and 65% equity, which was more or less in line with the Merrill Lynch model portfolio for long-term growth. The Horizons program continued to significantly outperform the market but had suffered absolute declines of about 9%.

[47] By March 2002, Merrill Lynch had been taken over by CIBC Wood Gundy. The plaintiff’s portfolio was valued at about $4 million: cash - 18.9%, income - 15% and equity - 66%, compared to the model portfolio for long-term growth of cash - 10%, income - 25% and equity - 65%. The plaintiff’s portfolio had continued to outperform the world markets. Mr. Ruppert recommended maintaining the current positions. In March 2002, however, Mr. Ruppert began to provide the plaintiff with summaries of the liquidations being made to fund her significant cash withdrawals in an effort to illustrate the effect these withdrawals were having on her other investments; $5.6 million was withdrawn from January 2001 to February 2002.

[48] In June 2002, the plaintiff’s portfolio value was down to $2.8 million, consisting of cash - 4.7%, income - 20% and equity - 75%, compared to the model portfolio for long-term growth of cash - 10%, income - 25% and equities - 65%. The decline in value again reflected the effect of the plaintiff’s ongoing cash withdrawals. Mr. Ruppert recommended against selling at what seemed like the bottom of the market. But, he offered a heavier weighting of high-yield fixed income products and market-neutral hedge funds if the plaintiff decided not to stay in diversified equities. The plaintiff acted on the latter recommendation.

[49] The last portfolio review in September 2002 showed a portfolio value of almost $3 million, now weighted 30% cash, 19% income, 26% equity and 25% market neutral hedge funds. Again, the portfolio had outperformed world markets. The absolute decline in value largely resulted from the plaintiff’s cash withdrawals.

[50] By about mid-2003 the plaintiff had lost confidence in Mr. Ruppert and began talking to other investment advisors. Eventually, at the end of 2003, the plaintiff terminated her account with Mr. Ruppert and transferred the remaining assets to her new advisor. At that time, the account’s value was $310,589.22.

[51] This action was commenced in 2004. During the course of the litigation, Mr. LeRiche died. The plaintiff sought no order to continue against the LeRiche estate. The plaintiff settled with Transamerica and the action against it was dismissed. CIBC World Markets Inc. is the successor to the other corporate defendants and the employer of the investment advisor, Mr. Ruppert.

Did the Defendants Owe the Plaintiff Duties of a Fiduciary Nature?

[52] The claim against Mr. Ruppert and CIBC World Markets alleges both negligence and breach of fiduciary duty. The essence of a fiduciary relationship is the undertaking by one to act on behalf of another. A fiduciary duty may arise in a broker/client relationship where such trust and confidence has been reposed in the broker by the client (in relation to the client’s investment decisions) that the client has given over to the broker the power to make those decisions on the client’s behalf: Hodgkinson v. Simms, [1994] 3 S.C.R. 377 at 419, 1994 70.

[53] The Court of Appeal for Ontario has identified five non-exhaustive factors that may point to a fiduciary relationship between broker and client:

(1) vulnerability arising from such things as age and degree of investment knowledge, education or experience;

(2) the degree of trust and confidence reposed in the broker and the extent to which the broker accepts that trust;

(3) whether there is a long history of reliance on the broker’s judgment and advice and whether the broker holds him or herself out as having special skill and knowledge upon which the client can rely;

(4) the extent to which the broker has power or discretion over the client’s account; and

(5) any professional rules which may define the duties of the broker and the standards to which he or she will be held,

Hunt v. TD Securities Inc., 66 OR (3d) 481, 2003 3649 at para 40.

[54] I do not think the plaintiff’s relationship with Mr. Ruppert could reasonably be characterized as fiduciary in nature. Much of the relevant evidence is reviewed below in the context of the defendants’ standard of care, but I will summarize the main points relevant to the question of fiduciary duty here. The plaintiff’s accounts were clearly not discretionary in nature: specific approval for every trade was required, and obtained, before being conducted. The plaintiff was a sophisticated businesswoman. She was well educated. She was the Senior Vice President of Human Resources of a large, international public company, reporting directly to the CEO. She was among the top 40 income earners in the firm. The plaintiff’s experience with investing was somewhat limited but she certainly understood the difference between fixed income and equities. She knew that to grow her available assets, investment in equities would be required. She wanted to grow her assets. The plaintiff understood, and had personal experience with, market risk and volatility having exercised Nortel options for several years prior to meeting Mr. Ruppert. She was not averse to holding onto Nortel shares to speculate on the market. In August 2000 and early 2001, when the critical decisions in issue in this action were made, the plaintiff did not have a long-standing relationship with Mr. Ruppert, having only met him for their first serious discussion in April 2000. I have no doubt that the plaintiff trusted Mr. Ruppert and relied on his recommendations but I find as a fact that the level of trust and reliance did not extend to the conferral of power by the plaintiff on Mr. Ruppert to make investment decisions on her behalf. The applicable regulatory rules governing Mr. Ruppert’s conduct did not impose duties of a fiduciary nature.

[55] For all these reasons, I find that Mr. Ruppert did not owe fiduciary duties to the plaintiff.

Did the Defendants Breach the Duties Owed to the Plaintiff?

[56] It is not in controversy that an investment advisor has a duty to provide careful, competent and considered professional advice. As long as the advisor applies reasonable skill and knowledge to the client recommendations and advises fully, honestly and in good faith, the investment advisor has discharged its obligation and is not responsible merely because the transaction proves unfavourable. Investment advisors are not guarantors. They are under no duty to provide only successful financial advice. What they must do is apply reasonable skill and care which is appropriate to the task undertaken: Graham v. Wells, 2015 BCSC 734 at para 68; Young Estate v. RBC Dominion Securities, [2008] OJ 5418 at para 882 (SCJ); Mills v. Merrill Lynch Canada Inc., 2005 BCSC 151 at para 128. In this case, the principal “task undertaken” was the recommendation of suitable investments in late 2000 and early 2001.

[57] Investment advisors have a duty to recommend investments that are suitable for their clients’ portfolios. This duty is conceded by the defendants. The duty has been described as follows:

Suitability involves an assessment of whether the investment purchased or held (viewed both in isolation and in the context of the portfolio as a whole) are appropriate for the client in all the circumstances taking into account such facts as the client’s financial situation, investment knowledge, time horizon, investment objectives and risk tolerance,

Roddey and Monahan, The Law Relating to Investment Advisors (Markham: LexisNexus, 2015) at 162.

[58] At the heart of this duty is the IDA regulation (now IIROC), s. 1300.1. In April 2000 that regulation provided:

Every member shall use due diligence:

(c) to ensure that recommendations made for any account or appropriate for the client and in keeping with his investment objectives.

[59] In September 2001 the regulation was amended to provide that:

Subject to regulation 1300.1(e), each Member shall use due diligence to ensure that the acceptance of any order from a customer is suitable for such customer based on factors including the customer’s financial situation, investment knowledge, investment objectives and risk tolerance.

[60] This change reflected emerging judicial authority. For example, in Newman v. T.D. Securities Inc., 2007 463 at para 39 (ON SC), Smith J. set out five factors to consider in relation to suitability of investments for a client:

(i) age;

(ii) income and net worth;

(iii) investment knowledge;

(iv) investment objectives; and

(v) risk tolerance.

[61] It is also common ground that the application of these principles varies on a case-by-case basis.

The Experts’ Evidence

[62] In virtually all professional negligence actions, the testimony of a properly qualified expert is critical to establishing the appropriate standard of care and whether the defendant professional’s conduct fell below that standard of care.

[63] The plaintiff relies on the expert opinion of Mr. Boyce. The defendant relies on the expert opinion of Mr. Horgan. Both experts’ qualifications to give opinion evidence on the standard of care of an investment advisor in relation to suitable investments in securities was conceded by the other side. They both have long and impressive resumes. Both had been qualified to testify as experts in numerous prior proceedings. I accepted both experts as qualified to give opinion evidence on the standard of care of an investment advisor in relation to the suitability of investments in securities.

[64] The defendants objected, however, to Mr. Boyce expressing any opinion on the suitability of the investment in the universal life policy because, by his own admission, Mr. Boyce had no expertise in insurance products. I allowed Mr. Boyce to opine on the suitability of this investment only to the extent that he relied upon the fact, conceded by both sides, that the universal life policy “locked up” the funds invested for 10 years. I also ruled that Mr. Boyce did not have the qualifications to enable him to give expert opinion evidence on the value of that investment, beyond acknowledging its 2012 surrender value of $119,638.50 which, again, was not in dispute.

[65] Mr. Boyce came from a regulatory and enforcement background. Most of his career in the securities industry was doing investigations and enforcement work at the Toronto Stock Exchange, the Independent Dealers Association and the IIROC. He has never worked at a securities firm as a broker or otherwise. In contrast, Mr. Horgan came from a compliance and audit background with a securities firm. Most of his working life has been with RBC Dominion Securities and predecessor companies, until he became an independent consultant in 1986.

[66] The experts’ backgrounds tended to dominate their perspectives on this case. They were, to some extent, ships passing in the night.

Mr. Boyce

[67] Mr. Boyce concluded that Mr. Ruppert did not meet the minimum standard of care of an investment advisor in his handling of Dr. Kerr’s investments. The essence of his criticism of Mr. Ruppert is focused on the recommendation to invest the bulk of the plaintiff’s available capital in a portfolio (the Horizons program) weighted towards long term growth. This, Mr. Boyce opined, failed to meet Dr. Kerr’s “documented need for income,” resulting in her having to draw on capital to meet her income needs. This, he concluded, created a spiraling reduction of her investment asset base, making it less and less able to meet her income needs and making her draw more and more on capital until that capital was substantially depleted.

[68] For essentially the same reason, Mr. Boyce concluded that the recommendation to invest in the universal life policy was also inconsistent with Dr. Kerr’s documented need for income, given that the universal life policy would produce no income for 10 years.

[69] Mr. Boyce also concluded that Mr. Ruppert’s recommendation to invest in US and international securities (via Horizons) failed to provide Dr. Kerr with tax advantages associated with income from Canadian dividends and exposed her to unnecessary foreign exchange risk.

[70] Mr. Boyce also concluded that Mr. Ruppert failed to document Dr. Kerr’s accounts in accordance with the standards of the industry because Mr. Ruppert included in Dr. Kerr’s net worth prospective receipts from the exercise of options that were not yet exercisable. Since these options were not yet exercisable, he opined that they had no intrinsic value. He also criticized Mr. Ruppert for allegedly not deducting tax liabilities payable in the near future when assessing the plaintiff’s net worth.

[71] Finally, Mr. Boyce concluded that Mr. Ruppert fell below the standard of care by frequently leaving large amounts of cash invested in the accounts, which produced little or no return.

[72] The latter three issues can be dealt with briefly. The Canadian dividend and foreign-exchange issues are de minimis on the evidence, and by Mr. Boyce’s own admission. There is no evidence of any material loss associated with these points. In addition, I agree with Mr. Horgan that any tax benefit associated with Canadian dividends was more than offset by the benefits of diversification which were available through the Horizons program. The plaintiff already had a large position in Canadian (Nortel) stocks and options. It was therefore prudent to diversify away from, among other things, exclusively Canadian holdings. In addition, the majority of the cash withdrawals ended up being used to cover the expense of developing the Jamaica property. This was all in US dollars. Thus, having US investments actually reduced foreign exchange risk associated with the Jamaica expenditures.

[73] The criticism of the entries on the new client application forms are largely formalistic. While it is true that accurate information is necessary for adequate supervision, among other things, there is no evidence of, or claim for, inadequate supervision. Further, the evidence is that Mr. Ruppert was well aware of the relevant facts associated with Dr. Kerr’s situation and accounts, regardless of whether they were precisely reflected in the client application forms or not. I find that Mr. Ruppert did not ignore the plaintiff’s pending tax liability but prepared for that liability appropriately.

[74] Regarding the change in characterization of the plaintiff’s investment knowledge from “limited” to “good,” I accept Mr. Ruppert’s evidence that the detailed discussions he had with the plaintiff between May and August 2000 satisfied him that the change was warranted. There is inevitably some subjectivity in assessments such as these. I am not prepared to conclude that this assessment was so unreasonable as to constitute a breach of Mr. Ruppert’s duty of care. Even if I were to conclude otherwise, however, there is no evidence that this “mistake,” assuming it was one, caused or contributed to any loss suffered by the plaintiff.

[75] The issue of the future Nortel options and the influence of their possible value in developing Mr. Ruppert’s recommendations is related to Mr. Boyce’s main criticism regarding the failure to focus on Dr. Kerr’s income needs and I will deal with this issue in that context below.

[76] The fact that significant cash balances were left in the account was, I find, entirely reasonable. I say this because of the documented, and conceded, volume of unanticipated, variable cash withdrawals the plaintiff made from her account, starting almost immediately in September 2000 and continuing on through to the end of December 2003. Servicing those withdrawals required unusual cash availability in the account. For example, Mr. Boyce highlighted the May to December 2001 period as a period of improperly high cash holdings at $296,000, but over that time the plaintiff withdrew about $260,000 in cash. I find that it was prudent to keep substantial cash reserves on hand in the plaintiff’s account given the plaintiff’s decision to divert so much of her net worth to the development of Jamaican real estate. Mr. Ruppert appears to have done a reasonably good job of matching cash in the account to the actual withdrawals.

[77] The starting point for Mr. Boyce’s conclusion that a long-term growth portfolio was not suited to the plaintiff’s needs is that the bulk of the plaintiff’s available, uncommitted funds (over Cdn $6 million, which is net of the represented cash needs for the Jamaica and Ontario property improvements) was invested in equities which, although admittedly “blue-chip” in nature, did not produce significant income. Thus, Mr. Boyce says, leaving aside the extraordinary cash withdrawals from the account, the portfolio chosen was not even capable of generating the $300,000 after-tax required annually to meet the plaintiff’s stated income needs of $25,000 per month.

[78] Thus, where Mr. Boyce parts company with Mr. Ruppert’s recommendation is over a fairly narrow and subtle, but important, point. Mr. Boyce concedes that no investment strategy could have satisfied the level of cash withdrawals that actually took place without a significant erosion of capital. Mr. Boyce is therefore driven to the position that, had the portfolio been more oriented towards income, the erosion of capital would not have been as extreme. Mr. Boyce makes this point by selecting two “benchmarks” for what he says would have been an appropriately income-focused portfolio.

[79] His first benchmark is the BMO Monthly Income Fund. It was chosen on the basis of its mandate, which was “to provide a fixed monthly distribution while preserving the value” of the investment. This fund was described as investing “primarily in Canadian fixed income securities with higher than average yields, issued by the federal government, provincial governments, government agencies and corporations, as well as preferred and common shares, real estate investment trusts (REITs), royalty trusts and other high-yielding investments.”

[80] Mr. Boyce took the plaintiff’s portfolio as of September 2000, assuming the $800,000 investment in the universal life policies had not been made, and, using the plaintiff’s actual withdrawals from the account, calculated what would have happened if the entire amount had been invested in the BMO Monthly Income Fund. In this scenario, Mr. Boyce concluded that, at the end of December 2003, the plaintiff’s shares in the BMO Monthly Income Fund would have had a value of about $4.3 million. Her actual account had a value of $310,589, making the “loss” suffered as a result of the alleged mismanagement of her account approximately $4 million.

[81] Mr. Boyce goes on to say that there were also alternative income-oriented investment products available, with somewhat higher risk, which provided even better returns. As a second benchmark, he chose the Sentry Select Diversified Income Trust. This was a trust of trusts: it invested in other income trusts and flowed the income through to its investors. Sentry Select units traded on the Toronto Stock Exchange.

[82] Mr. Boyce used the same basic method with Sentry Select as he did with the BMO Monthly Income Fund. Thus, he took the plaintiff’s portfolio as of September 2000, ignored the $800,000 investment in the universal life policies and, using the plaintiff’s actual withdrawals from the account, calculated what would have happened if the entire amount had been invested in units of Sentry Select. He calculated that, at the end of December 2003, the plaintiff’s Sentry Select units would have been worth about $8.4 million, making her “loss” approximately $8.1 million.

[83] Mr. Boyce then created a “blended” approach using a 50/50 split between the two benchmarks. This produced a blended loss of about $6 million as of December 2003.

Mr. Horgan

[84] Mr. Horgan starts with the perspective that what the plaintiff wanted, signed up for and approved was a balanced long-term growth portfolio. He says that Mr. Ruppert recommended a suitable portfolio for a person of the plaintiff’s age, experience and financial circumstances. In his opinion, Mr. Ruppert did not, therefore, fall below the standard of a reasonable investment advisor in the circumstances of this case.

[85] Mr. Horgan takes issue with Mr. Boyce’s “benchmarks” which, he says, are not benchmarks at all. They are simply two funds, BMO Monthly Income and Sentry Select, that happened to perform extremely well during the market downturn. Neither these funds, nor the underlying assets in which these funds were invested, were entirely suitable for the plaintiff and, even if they were, they were not that different in concept from the recommendations made by Mr. Ruppert. They just happened to be two funds, out of hundreds of other funds that one could look at, whose performance significantly exceeded the market as a whole and the Horizons funds in particular.

[86] According to Mr. Horgan, the only appropriate benchmarks for measuring the performance of Mr. Ruppert’s recommendations are some combination of a bond index or a laddered bond portfolio (for income) and standard equities indices, like the S&P/TSX composite index (for equities). By these measures, Mr. Ruppert’s recommendations outperformed the market.

[87] The reason for the radical depletion of the plaintiff’s invested assets from September 2000 to December 2003 was the scale of her unanticipated cash withdrawals, which exceeded an average of $175,000 per month. Mr. Horgan says, in effect, that the plaintiff chose to invest in Jamaican real estate rather than the bond and equity markets.

Analysis

[88] I do not accept Mr. Boyce’s analysis of whether Mr. Ruppert met the standard of care in this case. I come to this conclusion for essentially four reasons.

(i) Income or Long Term Growth?

[89] First, Mr. Boyce’s opinion is rooted in the assumption that, given the plaintiff’s “documented need for income,” her “primary objective” was to generate income to meet her ongoing expenses.

[90] There is no doubt the plaintiff advised Mr. Ruppert that she anticipated needing

(a) $25,000 per month after tax to cover her own ($20,000) and her sister’s ($5,000) income needs following the plaintiff’s retirement at the end of 2000;

(b) about US$1 to 1.25 million to develop the Jamaica property; and

(c) about $150,000 for improvements to her Ontario properties (one of which she planned to sell).

[91] The assumption that the plaintiff’s “primary investment objective” was to generate income is not, however, supported by the evidence.

[92] From 1996 to 2000, the plaintiff’s stated investment objectives on her account opening forms were: income - 30% and capital gain - 70% for her margin account, and income - 50% and capital gain - 50% for her RRSP. In May 2000, when Mr. Ruppert became involved, her new CMA (margin) application form stipulated investment objectives of: income - 50% and capital gain - 50%. In her August 2000 new client application form made out for the purposes of opening the four Horizons accounts, the plaintiff stipulated that her investment objectives were: 100% capital gains. In February 2001, when the plaintiff transferred her Nortel savings plan from Sun Life to Merrill Lynch, she again, for her RRSP, declared investment objectives of: income - 50% and capital gain - 50%. The only account document signed by the plaintiff with an income orientation of more than 50% was her February 13, 2001 option account application form. This, the evidence is clear (and not contested), was filled out solely for the purpose of writing what are called “covered calls” on the plaintiff’s outstanding Nortel options, which would generate cash. This document states that the investment objective for this account was 100% income.

[93] The Statement of Claim was issued on March 12, 2004. Paragraph 15 of the statement of claim pleads:

At the time of engagement of the services of Ruppert and Merrill, (and later CIBC world), the plaintiff had limited investment experience and requested assistance in investing her funds in long-term growth assets.

Paragraph 16 of the statement of claim pleads:

Ruppert knew or should have known that Kerr wished to invest her money in a balanced manner, particularly after she retired early from Nortel on pension.

Paragraph 20 pleads:

Ruppert obtained information from Kerr as to her investment objectives and experience. He was or should have been aware that Kerr wanted to invest her funds conservatively, in a balanced manner.

[all emphases added]

[94] Although the statement of claim was amended in 2014, none of these paragraphs was changed. It was only at the end of the trial that the plaintiff’s counsel moved to further amend the Statement of Claim to delete the reference to “long term growth” and change the references to investment in a “balanced” manner to the need for “an income focused” approach.[^3]

[95] The plaintiff’s evidence at trial was, in my view, entirely consistent with the stated investment objectives in her client account documents and with her original pleadings.

[96] Dr. Kerr is and was an intelligent, sophisticated businesswoman who, as Senior Vice-President of Human Resources, occupied a position of significant authority and responsibility at Nortel. She was a member of the senior management team reporting directly to the chief executive officer with responsibility for the company’s human resource operations worldwide.

[97] I entirely accept that, in May 2000, the plaintiff was not an investment expert, or even a particularly experienced investor; but, by the same token, she was nobody’s fool.

[98] Dr. Kerr made it abundantly clear in her evidence that she understood the difference between equities and income-oriented investments, such as bonds. She knew what mutual funds were. She understood that fees were charged on mutual funds and on the activities instituted by her investment advisor at Midland Walwyn. Dr. Kerr had considerable experience with options, having exercised Nortel options and sold her optioned shares for several years. She followed Nortel’s stock price carefully and was all too familiar with market volatility as a result. Dr. Kerr admitted in cross-examination that she periodically held on to optioned shares, rather than realize on currently available gains, in the hopes that the Nortel share price would increase so that she could make even more money on the sale. She understood the concept of market risk and that, over time, equities tended to outperform bonds. She knew that she would have to invest a certain amount of her capital in equity positions to generate growth in her account. She wanted growth in her investments. Dr. Kerr understood the concept of a balanced portfolio that involved having bonds or fixed income instruments at lower yields with less risk and equities with higher yields but with higher risk. Dr. Kerr was also aware of the significant taxes she had to pay as a high income earner and on the profits she realized from exercising her Nortel options. She was interested, therefore, in strategies that would reduce or defer tax. She also knew that she wanted to pass on some of her wealth to her children at some point.

[99] The plaintiff testified that during the relevant period, she wanted to “make some money on the stock market.” She admitted that she was comfortable investing in the market over the long term. She understood that by investing in Horizons, she would be investing in solid, diverse, blue-chip equities. It is not in dispute that the Horizons program was composed of solid, diverse, blue-chip equities. Although Dr. Kerr testified that she did not recall the term “long-term growth” being used in any discussions with Mr. Ruppert, that expression is referred to repeatedly in documents sent to her and that were reviewed by her in detail with her investment advisor. The semiannual portfolio reviews all make reference to the investment objective being “long-term growth.” Her account statements, which she admitted to reviewing in some detail, all showed assets allocations with significant equity positions. There is no evidence that the plaintiff ever raised any concerns about this until well into 2002, when her asset base was significantly eroded by a combination of the failure of Nortel, the world market downturn and her extraordinary cash withdrawals for the Jamaica real estate development.

[100] The plaintiff testified that she did not know until preparing for trial that in September 2000, Cdn $6.6 million, rather than $4 million had been invested in the Horizons program. I cannot accept this evidence. The September 2000 account statement clearly shows a withdrawal of $6.6 million. The plaintiff admitted that she looked at her statements, even highlighting underperforming investments, on a regular basis.

[101] Mr. Boyce, in his evidence, treated the Ontario and Jamaica real estate improvement expenses as “cash” requirements. I do not think this is correct. The Toronto home, the ski chalet and the Jamaica property were all assets. In 2000 and early 2001, the cost of the improvements was anticipated to be essentially one-off expenditures. They represented capital asset-shifting which would remain part of the plaintiff’s assets and net worth, potentially increasing their value. They did not represent cash flow needs in any normally accepted sense of the word.

[102] Mr. Ruppert testified that he treated the anticipated real estate improvement expenditures as one-off asset transfers. They were, in this regard, totally unlike the plaintiff’s monthly cash flow needs or the pending tax liability resulting from the exercise of her 2000 options, both of which represented pure expenditure. Mr. Ruppert, therefore, did not regard the real estate improvement costs as part of the plaintiff’s anticipated cash flow needs. In doing so, I do not think he was acting unreasonably. It must also be remembered that, in 2000 and early 2001, the cost of building the home in Jamaica was anticipated to be about US $1 million, or a little more. It ended up being at least US $4 million. In addition, the timing and amount of withdrawals were erratic.

[103] At the time of her retirement, the plaintiff was still relatively young. She had cash flow needs to be sure, but with any luck, she was also likely to live for another 30 or 40 years. I agree with Mr. Horgan’s expert opinion that, not only did the plaintiff want growth, she needed growth. This was consistent with the plaintiff’s own evidence on her discovery (in 2005) and at trial. Putting her in fixed income investments, such as a laddered bond portfolio, for example, would have been extremely safe and generated cash flow but would not have seen her through to an advanced age, especially given the minimum yields on fixed income instruments since at least 2008.

[104] The evidence is not in dispute that there was a significant market correction in 2000. It is not a breach of the duty of care to have failed to anticipate a worldwide decline in equity markets, as Goepel J. acknowledged in Longstaff v. Robinson, 2008 BCSC 1488 at para 101:

Between 2000 and 2002, the stock market suffered its worst decline since the 1920s. The mutual funds selected by Mr. Robinson were not high risk or speculative in nature and performed as well as the market itself.

In this case, the Horizon investments recommended by Mr. Ruppert performed better than the market, despite the significant world-wide decline in equity markets.

[105] Mr. Polley argued strenuously that even if the plaintiff agreed to Mr. Ruppert’s recommendations, it was not informed consent and that Mr. Ruppert owed a duty to warn her against investing in long-term growth equities (even though they were admittedly solid, “blue-chip” investments with top-rated money managers) because of her anticipated income needs. He says the option of an income-focused portfolio was never raised or discussed.

[106] There are at least three problems with this argument. First, there is no pleading to this effect. Indeed, the statement of claim, as discussed above, specifically alleges that the plaintiff wanted, and needed, a balanced, long-term growth portfolio. Second, given my conclusion in paragraph 103 above, an income–focused portfolio would not necessarily have been capable of servicing the plaintiff’s financial needs to an advanced age. If that is true, it was not necessary to discuss a portfolio that would not have met the plaintiff’s needs in order to meet the standard of care. Third, as will be discussed in detail below, I am not satisfied that a reasonable benchmark for an income-focused portfolio, such as a laddered bond portfolio or a market-based bond index, would have resulted in an outcome any better than the result actually achieved by Mr. Ruppert.

[107] On this point, I find that the objective of balanced long-term growth was reasonable and endorsed by the plaintiff, who understood the trade-offs and risks involved with this approach.

The Motion to Amend

[108] In the context of this issue, I will also deal with the plaintiff’s motion to amend the statement of claim.

[109] As noted above, the original Statement of Claim was issued on March 12, 2004. With respect to investment objectives, the plaintiff pleaded:

15. At the time of engagement of the services of Ruppert and Merrill, (and later CIBC world), the plaintiff had limited investment experience and requested assistance in investing her funds in long-term growth assets.

16. Ruppert knew or should have known that Kerr wished to invest her money in a balanced manner, particularly after she retired early from Nortel on pension.

17. Ruppert obtained information from Kerr as to her investment objectives and experience. He was or should have been aware that Kerr wanted to invest her funds conservatively, in a balanced manner.

[110] Although the statement of claim was amended in 2014, none of these paragraphs was changed. At the end of the trial, the plaintiff moved to further amend the Statement of Claim to delete the reference to “long term growth” in paragraph 15 and to change the references to investment in a “balanced” manner in paragraphs 16 and 20 to alleging the need for “an income focused” approach.

[111] Rule 26, of course, provides that the court shall grant an amendment unless prejudice that could not be compensated for by costs or an adjournment would result.

[112] The plaintiff maintains that the proposed amendments will cause no prejudice to the defendants. Her counsel says this for essentially two reasons. First, the report of Mr. Boyce was initially served in 2013. In that report, Mr. Boyce made it clear that his principal complaint about Mr. Ruppert’s conduct was that he caused the plaintiff to invest in a portfolio weighted towards capital growth that failed to meet her alleged primary objective of generating income sufficient to meet her ongoing expenses.

[113] Second, the plaintiff points to other paragraphs in the Statement of Claim which make it clear that the plaintiff’s complaint involved the allegation that Mr. Ruppert’s recommended portfolio inadequately provided for income:

paragraph 19 stipulates that Ruppert “knew or should have been aware that these financial obligation [the plaintiff’s cash flow needs] needed to be addressed in the financial strategies proposed;”

paragraph 23 alleges Ruppert invested “the bulk of Kerr’s funds in growth oriented securities (both in the nonregistered assets as well as within the universal life policy) with the 3 to 5 year time horizon, notwithstanding the fact that Kerr expected to retire in December 2, 2000 and still required $2 million U.S. for building purposes;”

paragraph 24 refers to “the aggressive nature of the investments in advisability of such a high concentration in equities;”

paragraph 25 alleges that inadequate funds were set aside for the construction of the home resulting in the forced liquidation of investments and resulting capital losses;

paragraph 27(c) complains that “the aggressive investment strategy recommended and implemented was inconsistent with the short-term and long-term goals and objectives” of the plaintiff; and

paragraph 36(b) alleges a failure to advise the plaintiff that the universal life policy “would severely and excessively deplete her non-registered assets which would otherwise be available for her ongoing living expenses.”

[114] The plaintiff argues that documentary discovery proceeded on the basis of these issues being in play. These issues were allegedly in play (and the subject of evidence in chief and cross-examination of fact and expert witnesses) during the trial. On this basis, the plaintiff submits that the proposed amendments do not raise any issues that the original Statement of Claim did not already disclose.

[115] Rule 51.05 provides that an admission in a pleading may only be withdrawn on consent or with leave of the court. The Divisional Court has said that an “admission” is “an unambiguous, deliberate concession to the opposing party:” Griffiths v. Canaccord Capital Corporation, 2005 42485 at para 19 (Div Ct).

[116] The plaintiff maintains that the passages in the Statement of Claim sought to be amended are not deliberate, unambiguous or concessions to the defendants. The plaintiff contends that these allegations in the Statement of Claim cannot be deliberate concessions to the defendants because the defendants, in their Statement of Defence, denied these allegations. The defendants cannot now claim that these were admissions on which the defendants relied. The plaintiff further argues that, given the other allegations in the Statement of Claim concerning inadequate provision for cash flow, the passages sought to be amended cannot be regarded as unambiguous.

[117] In the alternative, the plaintiff argues that, even if the proposed amendments constitute the withdrawal of an admission, the plaintiff has met the test for withdrawing admissions:

(i) there is a triable issue with respect to the amendment;

(ii) there is a reasonable explanation for the change; and,

(iii) there is no prejudice that cannot be compensated for by costs.

[118] The plaintiff argues that, not only is there a triable issue but there has been a trial on this issue. The plaintiff relies on what she says are certain conflicts or internal contradictions between the pleaded allegations to suggest that an amendment is required to “clarify” the plaintiff’s position, thus establishing the requirement of a “reasonable explanation” for the change. Finally, the plaintiff argues that it meets the third requirement because, as noted above, other allegations in the Statement of Claim and Mr. Boyce’s report, made it clear that the plaintiff’s claim focused on the recommended portfolio’s inadequate income stream.

Analysis

[119] In the unique circumstances of this case, I am unable to agree with the plaintiff’s submission that the statements sought to be excised from the Statement of Claim by way of amendment are not admissions or that the test for withdrawing an admission has been met.

[120] The plaintiff’s argument glosses over an important distinction between investment objectives and the manner in which those objectives are implemented or achieved. What the plaintiff’s investment objectives were in 2000 is an important fact in this lawsuit. Rule 1300.1 of the IIROC Rules includes the client’s “investment objectives” as a key factor in determining the suitability of investment recommendations.

[121] The statement of claim pleads that the objectives were for long-term growth and a balanced portfolio. There is nothing inconsistent between a balanced long-term growth objective and a need for, and provision of, cash flow. The plaintiff was looking for both. As Dr. Kerr put it on her examination for discovery (conducted in 2005, much closer to the events in issue, which was read in as part of the defendant’s case[^4]),

… we talked about initially investments that were… The ultraconservative bonds and… Other things along that line, that – and that the only way to really grow your portfolio was to invest in the stock market. And I thought I was certainly comfortable to a degree in doing that, and I was comfortable in long term – you know, the long-term investments with the exception of – I’m wanting to plan for long-term and for wealth to pass to my children, but that I had to make it so I had near-term needs as well as long-term needs…

[122] I cannot accept the plaintiff’s characterization of the proposed amendments as simply “cleanup.” Indeed, were that so, it is difficult to understand why the amendments are being sought at all. The statements made in paragraphs 15, 16 and 20 of her statement of claim are, in my opinion, unambiguous and deliberate concessions made in this lawsuit. They are concessions about an important fact – what the plaintiff’s investment objectives were in 2000. The plaintiff’s evidence on discovery and at trial are consistent with that concession. The plaintiff wants to amend those admissions because they are inconsistent with the plaintiff’s expert’s opinion.

[123] I agree with the plaintiff that whether the recommended portfolio made adequate provision for cash flow was certainly pleaded and clearly in play. But, as I read the pleading, this goes to the adequacy of the implementation of the objectives for a balanced portfolio, i.e., the recommendations Mr. Ruppert actually made, not to the content of the investment objectives themselves.

[124] In other circumstances I might have agreed with the plaintiff that she raised a triable issue about the withdrawal of the admission; however, there has already been a trial. In my reasons above, I have found as a fact that the plaintiff’s objectives were balanced long-term growth - a finding entirely consistent with the original pleading, the contemporaneous account documents and her evidence at trial.

[125] The plaintiff filed no evidence on the motion to amend. She did not, in the context of her examination during the trial, speak to this issue specifically. The Statement of Claim was prepared in 2004, immediately following the events giving rise to the claim. The Statement of Claim was, on the evidence, prepared with the benefit of independent financial and legal advice. The plaintiff has not provided a reasonable explanation for her change in position. For example, the plaintiff has not come forward with evidence of a mistake or a misunderstanding or an inadvertent slip in the drafting of the Statement of Claim. To the contrary, as I have found in these reasons above, the pleaded objectives of long-term balanced growth are entirely consistent with the contemporaneous documentary evidence and the plaintiff’s own testimony about her investment objectives at the time.

[126] Lastly, I am not satisfied that the plaintiff has established there will be no prejudice to the defendants. As I have said, Rule 1300.1 makes investment objectives a critical component of evaluating the suitability of an investment advisor’s recommendations. This case proceeded on the basis of the investment objectives, as pleaded, with the focus being on whether the recommendations were suitable in the context of those admitted objectives.

[127] It is certainly true that Mr. Boyce sought to change that focus. Experts, however, must take the facts as they find them. In this case, there was an admitted fact that the investment objectives were for long-term balanced growth. Mr. Horgan used, as his starting point, the pleaded admissions and the account opening documents which are consistent with the pleaded admissions. I do not think it can be said, now that the trial is over, that the defendants would suffer no prejudice as a result of this fundamental shift in position.

[128] For the above reasons, I deny the contested portion of the plaintiff’s motion to amend the Statement of Claim. The admission is therefore part of the total factual record that I must take into account in coming to a conclusion on the issues in this lawsuit.

(ii) The Effect of the Unanticipated Cash Withdrawals

[129] The second reason I have rejected Mr. Boyce’s opinion is that he failed to show that, had the cash flow demands and expenditures been as represented, Mr. Ruppert’s recommendation would not have been a perfectly reasonable strategy. There is no evidence before me calculating the performance of the plaintiff’s account on the assumption that only $300,000 per year was required, plus a capital transfer of US $1 million to $1.25 million for the Jamaica property and another capital transfer of $150,000 regarding the Toronto home and the ski chalet. Such an analysis would also have to include the fact that the market had bottomed out in late 2002, returned to its 2000 levels by 2005 and was at historic highs until the mortgage-backed securities crisis in late 2008. Since then, of course, the market has again increased by about 6,000 points to a new record high.

[130] Mr. Polley argues that expert testimony on this particular point is not necessary. “Simple math,” he argues, shows that the income produced by Mr. Ruppert’s recommended portfolio did not fulfil, and could not have fulfilled, even the basic requirement for $300,000 per year in generated income.

[131] I am not convinced this is so. As Mr. Horgan pointed out, at the beginning of 2001 the plaintiff had available capital assets of about $8.5 million. A return of only about 3% was sufficient to produce the plaintiff’s anticipated cash requirements. It has not been shown that the portfolio recommended by Mr. Ruppert could not, over time, have kept pace with that level of return.[^5] The evidence is, for example, that the Horizons money managers consistently outperformed the market.

[132] It is true that the plaintiff suffered capital losses of about $1 million on her Horizons portfolio. But that is because she was obliged to sell equities from the Horizons program at the bottom of the market due to the unanticipated volume of her cash withdrawals. Mr. Ruppert advised against this repeatedly, but the plaintiff chose to continue funding her Jamaican real estate project over rolling back, or deferring, those expenditures and hanging on to her equity investments.

(iii) The Two “Benchmarks”

[133] I will return to the benchmarks issue in more detail below in the context of causation and damages but it is necessary to comment, in this context as well, on Mr. Boyce’s use of his two chosen “benchmarks.”

[134] Part of Mr. Boyce’s analysis is that Mr. Ruppert’s recommended portfolio resulted in the depletion of virtually all of the plaintiff’s capital whereas other portfolio managers, using a different approach, would have preserved at least some of that capital (between $4 and $8 million). This analysis is done with the benefit of hindsight, knowing the plaintiff’s actual level of expenditure on the Jamaican real estate project.

[135] There is, in my view, a fundamental methodological flaw in this approach. It is not, and has never been, proof of professional negligence that someone else was capable of getting a better result. Mr. Boyce says he chose these benchmarks because they had an income-oriented mandate. But, he admitted, these two were chosen from among hundreds of possible candidates. With the number of funds and fund managers operating in North America, it is inevitable that, even by random chance, some will outperform others, sometimes by a wide margin.

[136] I agree with Mr. Horgan that one or two isolated funds, selected with the benefit of hindsight, is not an appropriate benchmark for measuring whether an investment advisor fell below the reasonable standard of care. The performance, as he said, of a BMO Monthly Income or Sentry Select fund should be measured against an objective benchmark, not used as one. Indeed, the BMO fund did benchmark itself against the S&P/TSX composite index, various bond indices and the TSE 300. Sentry Select also benchmarked itself against the S&P/TSX composite index and the Scotia Capital Income Trust Index. The evidence is that these two “benchmark” funds performed significantly better than the market as a whole, whether measured by diversified bond portfolios or standard equities indices like the S&P/TSX composite index or the S&P 500. There is, therefore, an inherent and serious bias against the defendants in the choice of such benchmarks.

[137] It is also not clear that the underlying investments in the two “benchmark” funds were conceptually all that different from what Mr. Ruppert was trying to do or that they would have been entirely suitable for someone like the plaintiff in any event. The BMO asset mix included significant Canadian and foreign equities as well as fixed income instruments, without limit (the fund was 54% equities in 2005, for example). In order to meet its payout targets, this fund had the ability to encroach on capital and did so. It also had the ability to invest in assets which would have been entirely inappropriate for the plaintiff, such as low or unrated securities and derivative instruments, in an effort to boost yields. Mr. Boyce also acknowledged that the BMO fund did not even generate returns sufficient to cover the plaintiff’s anticipated cash flow needs of $25,000 per month.

[138] Sentry Select’s assets included no fixed income; its assets were all equities, almost exclusively income trust units. Sentry Select, therefore, lacked diversification and balance. Its primary objectives included capital growth which is inconsistent with Mr. Boyce’s focus on income, but consistent with Mr Ruppert’s recommendation. This fund was significantly weighted to particular, cyclical and highly volatile sectors (for example, energy). Mr. Boyce agreed that Sentry Select was highly volatile and highly profitable, “a bit of a high flyer,” he said. The Sentry Select fund was able to borrow (again, in effect, encroaching on capital) to make investments to boost yield. I find that Sentry Select invested in, or had the capacity to invest in, securities which would have been wholly inappropriate for the plaintiff.

[139] In summary, all Mr. Boyce has really shown through his use of these “benchmarks” is that, with the benefit of hindsight, the plaintiff would have done better investing in the BMO Monthly Income Fund or the Sentry Select fund than in the diversified Horizons blue-chip, growth oriented program in 2000. Mr. Boyce has cherry-picked what were, in retrospect, exceptional performers in an effort to show that Mr. Ruppert’s recommendation was not reasonable in the circumstances. This cannot be, and is not, the test for whether the standard of care of a reasonable investment advisor has been breached.

(iv) The Universal Life Policy

[140] The original recommendation to invest in the universal life policy would have committed a total of $4 million over five years. That would have provided $8 million of life insurance and tax-free growth over the long term. This would have resulted, depending on how long the plaintiff lived, in a very substantial wealth transfer to the plaintiff’s children. After 10 years, the plaintiff herself would have had access to the accumulated capital by borrowing against the policy.

[141] One controversial issue in this case is whether, in making their recommendation, Mr. Ruppert and Mr. LeRiche relied on the potentially significant gains that might have been realized from exercising additional outstanding Nortel options in the future and, if so, whether such reliance fell below the standard of a reasonable investment advisor.

[142] A second issue is whether, given what Mr. Boyce maintained was the plaintiff’s documented need for income, it fell below the standard of a reasonable investment advisor to recommend locking up her money for at least 10 years in this kind of product.

[143] Mr. Boyce opined that it would be negligent for an investment advisor to include the estimated value of the plaintiff’s unexercised Nortel options when calculating her assets available for investment or making recommendations for the investment of her assets. Mr. Horgan did not go that far. He opined that account ought to be taken of the options (because they were potentially valuable assets) but agreed that it would be imprudent to make firm commitments on the strength of those assets until the value of the options was actually realized.

[144] It is clear that both Mr. Ruppert and Mr. LeRiche were aware of the potential value of the plaintiff’s outstanding Nortel options at the end of 2000. The plaintiff told them so and it is recorded in written documents by both of them. I think that the original recommendation to invest $4 million in the universal life policy could only have made sense if additional Nortel options were profitably exercised. This is clear from the fact that, with over $6 million already invested in the Horizons program, the plaintiff would have had to put all of her remaining assets (and perhaps more), including her RRSP, into the universal life policies.

[145] Nothing turns on this, however, because the recommendation to invest $4 million in universal life policies was never acted upon. The amounts were initially reduced and then the contributions were suspended altogether. The plaintiff only invested a total of $800,000 in universal life policies. That was, at the time, only about 10% of her investable capital.

[146] Mr. Polley argues that the future options dominated all of Mr. Ruppert’s recommendations, however. He says Mr. Ruppert was lured into a more “aggressive” strategy at the beginning because he thought he could be “conservative later” when more options were cashed in.

[147] I think this language of “aggressive” and “conservative” misses the point. There is no suggestion in the evidence, and Mr. Boyce does not say, that investment in the Horizons program was too “aggressive” or that his recommended strategy of investment in more income-yielding securities was more “conservative.” Indeed, Mr. Boyce’s selected benchmarks, Sentry Select and BMO, appear to have been less “conservative” (and more “aggressive”) than the Horizons program. The issue is whether income had to prevail over long-term growth and balance – aggressive, conservative or otherwise.

[148] In any event, I find that Mr. Ruppert’s continued recommendation to invest in the Horizons program and the eventual $800,000 investment in universal life policies was not driven by speculation about future gains to be realized from the exercise of more Nortel options.

[149] This leaves the question of whether, as Mr. Boyce maintains, it was negligent for Mr. Ruppert to have recommended, or supported Mr. LeRiche’s recommendation, to invest $800,000 in universal life policies.

[150] The analysis of this issue must start with the observation that there is no evidence that any information given to the plaintiff concerning the universal life policies was wrong or misleading. Although the assumed 8% rate of return was criticized as being overly optimistic, the evidence is that the model was also run using an assumed rate of return of 4% at the plaintiff’s request. The universal life vehicle, using a 4% return, still produced significant benefits over a similar investment made in a taxed environment. Fees, another subject of adverse comment during the trial, were specifically addressed in the disclosure documents. Mr. Polley tried to argue that the fees paid to Mr. Ruppert and Mr. LeRiche in connection with this investment were grossly excessive and never disclosed. However, the amount of fees actually paid to Mr. Ruppert and Mr. LeRiche was never proved so there is little or no evidentiary support for this argument.

[151] Mr. Boyce’s complaint is a simple one: it was negligent to lock up $800,000 of the plaintiff’s money, given her cash flow requirements. I cannot agree with Mr. Boyce on this point. My disagreement rests on essentially four grounds.

[152] First, the reduced commitment to this investment represented only 10% of the plaintiff’s investable assets. I agree with Mr. Horgan that this was not an unreasonable amount to direct toward inter-family wealth transfers, given the circumstances.

[153] Second, and more importantly, the plaintiff clearly articulated her desire to transfer wealth to her children on a tax efficient basis. There is no evidence that the universal life policies were not an effective vehicle to achieve this objective.

[154] Third, there was an insurance component to this investment. Mr. Boyce, not being an insurance expert, was in no position to comment on the value or cost of the insurance component, or what level of insurance a person in the plaintiff’s situation might reasonably require. There is, therefore, no evidence about what that insurance coverage was worth to the plaintiff until the policies were surrendered in 2012. All we know is that they had a surrender value of about $120,000. What the value of the insurance coverage was during the currency of the policy has not been proved. It is clear, however, that there was some, and perhaps significant, value.

[155] Finally, Mr. Ruppert testified that, once it became apparent the plaintiff could not commit $4 million, or even $2 million, to this product, he recommended choices that nevertheless preserved her ability to invest more heavily in these policies in the future, if the plaintiff found herself in a position to do so. There was no contrary evidence. Mr. Boyce, not being an insurance expert, was in no position to say that Mr. Ruppert’s recommendations were wrong, unreasonable or without value.

[156] For these reasons, I do not think it has been proven on a balance of probabilities that the recommendation to invest $800,000 in universal life policies fell below the reasonable standard of care of an investment advisor. In my view, it was inappropriate for Mr. Boyce to ignore this expenditure and assume it was available for alternative investment in September 2000.

[157] For all these reasons, I conclude that Mr. Ruppert’s conduct did not fall below the standard of care owed by an investment advisor to a client of the plaintiff’s age, needs and financial circumstances.

Did the Defendants’ Breach of Duty Cause the Plaintiff’s Loss?

[158] Even if I had concluded that the defendants breached their duty of care to make suitable recommendations, I would be bound to conclude, on the evidence, that the plaintiff has not proved on a balance of probabilities that Mr. Ruppert’s conduct was the cause of any loss.

[159] My principal reason for coming to this conclusion was touched on earlier in these reasons.

[160] In his analysis of the plaintiff’s loss, Mr. Boyce eschewed the use of any standard indices, such as bond indices or market indices like the S&P/TSX composite index. He was unable to explain why he did so, other than saying that he chose BMO and Sentry Select because of their stated “mandate” to produce regular income.

[161] There is simply no evidence that these two funds are in anyway representative of the hundreds of other similar funds available for potential investment, or of reasonable, as opposed to superlative, performance within that market. Nor did Mr. Boyce purport to make any such claim.

[162] It is simply not the law that to avoid falling below the standard of care of a reasonable investment advisor, a defendant must match or exceed the performance of particular managers who achieve extraordinary gains. Indeed, extraordinary gains are often associated with extraordinary risks and extraordinary volatility. Significant volatility, at least, was clearly implicated in the case of Sentry Select.

[163] Mr. Boyce claimed he was not suggesting that Mr. Ruppert should have actually invested in these two funds. Mr. Boyce was merely suggesting that Mr. Ruppert should have invested in a similar suite of assets, i.e., assets which were purchased for their income-generating characteristics.

[164] Scratching the surface of Mr. Boyce’s benchmark funds reveals that they too invested significantly in equities. As noted above, the evidence establishes that Mr. Ruppert did recommend remarkably similar investments - merely different ones which, while they outperformed the market, did not outperform BMO or Sentry Select. In addition, the managers of BMO and Sentry Select had the ability to, and did, encroach on capital (as Mr. Ruppert was obliged to do) in order to achieve forecast yields. They also had the ability to make investments that would have been wholly inappropriate for a client like Dr. Kerr, such as junk bonds and derivatives.

[165] Neither Mr. Boyce nor the plaintiff’s counsel was able to point to any prior judicial decision endorsing Mr. Boyce’s approach to causation and damages through the selection of exceptional performers as a benchmark for the conduct of a reasonably prudent investment advisor making suitable recommendations.

[166] The fundamental methodological flaws in Mr. Boyce’s opinion disentitles it to be used as a means of proving a causal relationship between Mr. Ruppert’s recommendations and any loss, or as a means of quantifying that loss. To repeat, Mr. Boyce’s evidence has not shown, on a balance of probabilities, that Mr. Ruppert’s recommendations (based on information known at the time, including a regular, fixed cash flow requirement of only $25,000 per month) were the cause of any loss when compared to any reasonable, market-based benchmark of general application.

[167] Indeed, I find the evidence supports the opposite conclusion. The principal cause of the plaintiff’s capital depletion was the unforeseen and drastic level of cash withdrawals, most of which appear to have been diverted to improving her property in Jamaica.

What Are the Plaintiff’s Damages, If Any?

[168] As discussed above, I am not satisfied that Mr. Boyce has properly calculated the measure of the plaintiff’s loss. In the absence of any other method proven in evidence, I would be bound to conclude that the plaintiff has not proved any damages.

[169] Even if I had found merit in Mr. Boyce’s approach, I would not have been able to approve his calculation of “opportunity loss” post-December 2003.

[170] In calculating that loss, Mr. Boyce used the BMO fund returns. I would have ruled that a blend of standard benchmarks, such as a laddered bond portfolio, a bond index and an equity index ought to have been used. Mr. Boyce also assumed no cash withdrawals (which is completely contrary to the entire basis of the rest of his opinion) but compounded the entire BMO yield from January 2004 to the present.

[171] I will not repeat my reasons for rejecting the BMO fund as an appropriate benchmark. Even assuming that the BMO fund returns were an appropriate benchmark, any damage calculation would have to remove an appropriate cash distribution component before compounding any earnings on available capital. It seems to me that cash withdrawals would also have to be adjusted upward to reflect inflation.

[172] In short, however, I find that the plaintiff has not proved any compensable damages.

Conclusion

[173] In conclusion,

(1) the defendants did not owe duties of a fiduciary nature to the plaintiff;

(2) the defendants did not fall below the standard of care of a reasonable investment advisor in the circumstances;

(3) the plaintiff has not proved a causal relationship between the defendant’s conduct and any loss; and

(4) the plaintiff has not proved that she has suffered any compensable loss.

[174] For these reasons, the action is dismissed.

Costs

[175] I encourage the parties to seek an accommodation on costs. Failing agreement, a party seeking costs shall do so by filing a brief written submission (not to exceed three typed, double-spaced pages) together with a Bill of Costs within two weeks. A party wishing to respond to such a submission shall also file a brief written submission (subject to the same page limit) within a further two weeks.

Penny J.

Released: February 23, 2017

CITATION: Kerr v. CIBC World Markets Inc., 2017 ONSC 777

COURT FILE NO.: 04-CV-265351-CM

DATE: 20170223

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Margaret Grace Kerr

Plaintiff

– and –

CIBC World Markets Inc., Merrill Lynch Canada Inc. CIBC Wood Gundy Financial Services Inc. Merrill Lynch Insurance Services Inc., Roy Ruppert, Gordon LeRiche and Transamerica Life Insurance Company of Canada

Defendants

REASONS FOR JUDGMENT

Penny J.

Released: February 23, 2017

[^1]: By 1999, Midland Walwyn had been taken over by Merrill Lynch.

[^2]: August 2000 proved to be the high water mark for Nortel stock. While the plaintiff’s options remained somewhat “in the money” until about mid-2001, she chose not to exercise those options in the hope that Nortel would rebound. After mid-2001, the options were never in the money again.

[^3]: I will return to the plaintiff's motion to amend her pleadings later in these reasons.

[^4]: The plaintiff did not, by the way, resile or attempt to resile from this evidence.

[^5]: Mr. Ruppert certainly thought that it could and testified to that effect.